Last week saw a number of important economic updates, with a focus on October’s business confidence and employment reports. The job report was a highlight, as more jobs were added during the month than expected and unemployment fell notably. This week will be relatively quiet, with updates focusing on inflation, the weekly jobless claims report, and the first look at consumer sentiment for November.
Last Week’s News
We started the week with Monday’s release of the ISM Manufacturing index for October. This gauge of manufacturer confidence rose by more than expected, going from 55.4 in September to 59.3 in October, against calls for an increase to 56. This result calmed fears that the index’s decline in September might have been the start of a negative trend. Manufacturer confidence has increased notably since hitting a lockdown-imposed low of 41.5 in April, and the index now sits well above pre-pandemic levels. This is a diffusion index, where values above 50 indicate expansion, and this result showed manufacturing expanding at the fastest pace since 2018. Ultimately, this strong report demonstrated manufacturing’s continued recovery in October despite rising case counts.
On Wednesday, the international trade report for September was released. The trade deficit narrowed from a 14-year low of $67 billion in August to $63.9 billion in September, which was in line with economist estimates. Despite this narrowing, September’s report marks the second-largest monthly trade deficit since 2008. This narrowing was primarily driven by a 2.6 percent increase in exports during the month, which was more than enough to offset a 0.5 percent rise in imports. Exports were buoyed by shipments of soybeans and capital goods in September. Imports have largely recovered to pre-pandemic levels, as consumer demand has rebounded sharply since the end of lockdowns. Exports continue to lag, however, highlighting the diverging recovery between producers and consumers over the past few months. With that being said, the rise in exports during the month is a positive development and indicates that trade may be a net positive for fourth-quarter economic growth if the trend continues.
Wednesday also saw the release of the ISM Services index for October. This measure of service sector confidence declined by more than expected during the month, falling from 57.8 in September to 56.6 in October, against calls for a drop to 57.5. This is a diffusion index, where values above 50 indicate expansion, so this modest decline leaves the index in expansionary territory. Service sector confidence sits near the pre-pandemic high of 57.3 hit in February, but the larger-than-expected decline during the month shows the threat that rising case counts present for service sector businesses. Given the drop in confidence, November’s service sector report will be widely monitored to see if rising case counts will turn into a more significant headwind for the ongoing service sector recovery.
On Thursday, the initial jobless claims report for the week ending October 31 was released. The number of initial claims fell slightly, from an upwardly revised 758,000 the week before to 751,000 in the final week of the month. Calls were for a larger decline to 735,000 initial claims. This report represents the lowest level of weekly initial claims since the pandemic began, but the pace of claims is more than three times higher than 2019’s weekly average. The high overall level of initial claims indicates considerable stress remains on the labor market, months after lockdowns ended. Continuing unemployment claims, which are reported with a one-week lag to initial claims, also showed improvement. They declined from 7.823 million to 7.285 million, against calls for a drop to 7.2 million. While the result for continuing claims is a positive development at first glance, there are signs that the numbers we’ve seen recently have been partially due to claimants exhausting their benefits rather than finding new employment. Overall, this report showed that the labor market is still under pressure and that a lot of work must be done to get back to pre-pandemic employment levels.
Thursday also saw the release of the FOMC rate decision from the Fed’s November meeting. The Fed cut rates to virtually zero in March as a response to the pandemic, and there were no changes to rates at this meeting, as expected. The press release following the meeting showed that Fed members are still very worried about the ongoing pandemic, citing “considerable risks” for the economy in the medium term. Fed Chair Jerome Powell expressed a continued commitment to the Fed’s asset purchasing program at his post-meeting press conference. Currently, the central bank is purchasing $80 billion in Treasury bonds and $40 billion in mortgage-backed securities monthly as part of its quantitative easing program. Overall, this meeting largely confirmed what we already knew: that the Fed remains willing and able to continue to support the ongoing economic recovery for as long as needed.
Finally, we finished the week with Friday’s release of the October employment report. The report showed that 638,000 jobs were added during the month, above the estimate for 580,000 but less than an upwardly revised 672,000 additional jobs the month before. The unemployment rate also beat forecasts, falling from 7.9 percent in September to 6.9 percent in October, against calls for a more modest decline to 7.6 percent. These results were an encouraging development, as they showed that rising case counts and political uncertainty were not enough to throw off the ongoing economic recovery. With that being said, the labor market is still facing significant stress. There is a long way to go to get back to pre-pandemic employment levels, as little more than half of the 22 million jobs lost in March and April have been recovered.
What to Look Forward To
Thursday will see the release of October’s Consumer Price Index report. This measure of consumer inflation is expected to show modest 0.2 percent growth during the month, in line with September’s 0.2 percent increase. On a year-over-year basis, headline consumer inflation is set to come in at 1.3 percent, down from the 1.4 percent annual inflation rate we saw in September. Core consumer inflation, which strips out the impact of food and energy prices, is expected to show a 0.2 percent increase during the month and a 1.7 percent increase year-over-year. This year, inflation has remained largely constrained due to the deflationary pressure created by the pandemic, lower demand for services weighing down upward price pressure. While prices for goods have seen more upward pressure than prices for services, notably in used car prices, there are signs that the pace of price increases is starting to slow.
Thursday will also see the release of the weekly initial jobless claims report for the week ending November 7. Economists expect to see the number of initial unemployment claims decline from 751,000 in the final week of October to 725,000 in the first week of November. If estimates hold, this report would mark the lowest number of weekly initial claims since March. On a historical basis, however, initial claims would still be quite high. Continuing unemployment claims are also expected to decline, but they will remain elevated compared with pre-pandemic levels. Given the overall high levels of both initial and continuing claims, this weekly report will continue to be widely followed.
On Friday, the October Producer Price Index is set to be released. Producer prices are expected to rise by 0.2 percent during the month, down from a larger-than-anticipated 0.4 percent increase in September. On a year-over-year basis, producer inflation should show 0.4 percent growth in October, in line with September’s 0.4 percent year-over-year inflation rate. Core producer prices, which strip out food and energy prices, are slated to rise by 0.3 percent during the month and 1.3 percent year-over-year. As previously mentioned, inflation has remained largely constrained this year due to the pandemic, making it highly unlikely that rising price pressure will trouble the Fed any time soon. Currently, the central bank is focused on getting Americans back to work and supporting the ongoing economic recovery.
We’ll finish the week with Friday’s release of the preliminary University of Michigan consumer sentiment survey for November. This first look at consumer confidence for the month is expected to show a modest improvement, from 81.8 in October to 82 to begin November. October saw the index rise by more than anticipated, and, if estimates hold, this report would mark the fourth straight month with improving sentiment. October’s report showed a notable partisan split in the responses, with Democrat sentiment rising notably and independent and Republican sentiment falling slightly. Given the partisan nature of October’s report, it will be interesting to see the impact the election has on sentiment for consumers across the political spectrum. Historically, improving consumer sentiment has supported spending growth, so any improvement for the index would be quite welcome, especially as we enter the important holiday shopping season.
That’s it for this week—thanks for reading and stay safe!